Question 2 (Basic and Diluted Earnings Per Share)

For the year ended 31 December 2020 Taunton Company had:

• 10,000,000 outstanding ordinary shares (no change during 2020).
• Convertible preference shares, $1.2 cumulative dividend per share, 1,000,000 shares outstanding (no change during 2020); each preference share is convertible into 2 ordinary shares.
• $5,000,000 of 7% convertible bonds issued at par; each $1,000 bond is convertible into 100 ordinary shares. No bonds were converted up to year-end date.
• On 1 July 2020, 3,000,000 stock options with an exercise price of $15 per share were issued. No stock options were exercised up to year-end date.
• Ordinary share market prices for 2020 were as follows:

Average for first 1/2 of year $14

Average for second 1/2 of year $18

Average for year $16

• Net income for 2020 was $6,500,000. No dividend has been declared this year. The income tax rate is 25%.

Required: (Carry EPS figures to 3 decimal places)

1. Compute the basic earnings per share for Taunton for 2020.
2. Without computing the diluted earnings per share, determine and briefly explain whether the stock option, the convertible preference shares and/or the convertible bonds would be dilutive or anti-dilutive. Show your analyses.
3. What would be the reported diluted earnings per share for Taunton for 2020?